Holiday pay for part-time and irregular hours workers has always been a difficult area to interpret and the Supreme Court have arguably complicated the issue further in their judgment in Harpur Trust v Brazel [2022] UKSC 21 which was handed down on 20 July 2022.

In a nutshell the outcome of this case is that paying a part time, zero hour or term time worker engaged on a permanent contract, holiday pay based on a calculation of 12.07% of hours worked is incorrect.

In this article, we examine the case in more detail, along with the different approaches used by employers to calculate holiday pay and the correct approach which now needs to be adopted.

Summary of Case

Mrs Brazel was a visiting music teacher who worked on a permanent zero hours contract for Harpur Trust. Harpur Trust were not obliged to provide a minimum amount of hours and Mrs Brazel was only paid for the hours that she worked. Mrs Brazel did not work a full working week and did not work during school holidays. Mrs Brazel was obliged to take holidays in the school holidays and was paid a lump sum at the end of each term as holiday pay. This was calculated on 12.07% of the pay she received for the term. Mrs Brazel  brought a claim for unlawful deduction of wages on the basis that this method did not reflect the calculation required by the Working Time Regulations 1998 which states that holiday pay should be based on an average of pay received over a 12 week period (this has now been changed to 52 weeks). The pay period should also ignore any weeks where the worker does not receive any pay. Mrs Brazel also argued that she was entitled to 5.6 weeks of holiday as she was engaged for the whole year, even though she only generally worked between 32 and 35 weeks of the year.

Outcome

The Employment Tribunal dismissed Mrs Brazel’s claims but this was subsequently overturned by the Employment Appeal Tribunal. The Court of Appeal supported the EAT’s decision in finding that the WTR 1998 did not provide for a pro-rating approach to calculating part-year workers holidays, even if this did mean that a part-year worker received a higher proportion of their annual earnings as holiday pay.

On further appeal, the Supreme Court have upheld the decisions of the EAT and Court of Appeal in finding that the 12.07% pro rata approach to holiday calculation for part-year workers is incorrect.

Where does the 12.07% calculation come from?

12.07% has typically been used in holiday pay calculations as it is the sum of 52 weeks less 5.6 weeks holidays which equals 46.4 standard working weeks in a year; and 5.6 weeks is 12.07% of 46.4 weeks. This approach was recommended by ACAS  but ACAS have since revoked this advice and no longer advocate this approach.

How has holiday pay been calculated previously?

The Court considered 3 different methods of calculation.

1. The Calendar Week Method– This involves looking back over the reference period of 52 weeks (at the time the reference period was 12 weeks), ignoring any weeks not worked and taking an average of hours worked. The average weekly hours is then multiplied by the hourly rate and multiplied again by 5.6 weeks to give the annual holiday pay entitlement. In this case, this amounted to £687.26 for the first term of work.

2. The Percentage Method– This involves taking the number of hours worked over the term and then multiplying this by 12.07% before multiplying again by the hourly rate of pay. This calculation provided that Mrs Brazel would receive £452.20 in holiday pay for the first term.

3. The Working Year Method– This approach considers how many weeks in the year the worker actually works out of the maximum of 46.4 weeks (52 weeks – 5.6 weeks holiday). In this case, Mrs Brazel usually worked 34 weeks out of 46.4 which is 0.73. 0.73 x 5.6 weeks gives a pro rata holiday allowance of 4.09 weeks. Pay would then be calculated using the calendar week method. This would have given Mrs Brazel a payment of approximately £499.83.

As you can see, the Calendar Week Method based on 5.6 weeks provides the most generous payment with the Percentage Method being the least generous of the approaches.

The Supreme Court found that the Calendar Week Method is the correct approach to use for any part time or part year worker engaged on a permanent contract, regardless of how many weeks out of the year, the worker actually works.

Comment

The reason why the Court has refused to implement a pro-rata exercise for part-time workers engaged on permanent contracts is because the legislation laid down by Parliament has not allowed for this and specifically provides that pay should be calculated using an average of 52 weeks which excludes any weeks that are not worked. It is therefore for Parliament to rectify this as it is accepted that the Calendar Week Method outlined above can lead to some absurd results.

The most extreme example used in this case was one of an exam invigilator who is engaged on a permanent contract to work 3 weeks of 40 hours per week per year. This would mean that this individual would receive 5.6 weeks pay, even though they only work 3 weeks in the whole year. Their holiday pay would therefore be nearly twice as much as their actual annual earnings.

Workers who work a small number of weeks per year but are engaged for the whole year, will see the greatest benefit from this case, as they will receive the highest percentage of holiday pay compared to their actual annual pay.

Which workers or employees does this case apply to?

As both workers and employees are entitled to holiday pay, it does not matter whether the staff member is classed as an employee or a worker. Also, it is very clear that this case does not only apply to term time workers but impacts any worker or employee who is paid an hourly rate and works irregular hours on a permanent basis. This includes zero hour workers, casual workers, term time workers and other part year workers.

This case is unlikely to impact salaried workers, whether full or part time. Similarly, it should not impact term time workers who are paid in 12 equal monthly instalments.

How should I calculate holiday entitlement and pay for workers with irregular hours?

The Courts have been very clear that we should now be using the Calendar Week Method and each time an employee takes annual leave, a new calculation will be required. Unfortunately, the WTR 1998 provides no answer as to how holiday entitlement should be translated to days or hours for workers with irregular hours. One option, as suggested by BEIS Guidance: How to calculate holiday entitlement for workers on different types of contracts is to calculate the average number of days worked in a week over a representative period.

What should I do now?

Any business which engages staff to work irregular or inconsistent hours on permanent contracts, (e.g. not on fixed term contracts) will need to urgently review how they pay these workers. If your business has used the Percentage Method of 12.07%, you will need to change your calculation and payment method as you may now be at risk of unlawful deduction of wages claims.

Our Top Tips

• Review your holiday pay and entitlement calculation methods to ensure that you are not at risk of an unlawful deduction of wages claim. Workers have 3 months from the date of the last unlawful deduction to start the claims process. They may also be able to claim up to 2 years of back pay.
• If you have been using the Percentage Method or another method for calculating holiday pay, you may want to consult with existing employees and workers to try and reach a compromise which should hopefully limit or prevent any employment tribunal claims.
• Going forward, you may want to consider engaging part time or irregular hours workers on fixed term contracts or self employed contracts depending on the type of work.
• You could consider giving zero hour workers at least some work per week or converting employees with irregular hours onto a lower fixed rate salary which is paid all year round, regardless of whether they are required to work every week.

If you are a Watertight HR & Legal Client then please do not hesitate to contact your dedicated advisor who can guide you through this process and give you the most up to date advice and support. If you would like to join the 100s of businesses who benefit from our comprehensive and cost effective HR Support package, then please click here to obtain a quote.

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